• Status quo as expected. The Bank of Japan (BoJ) kept its interest rate unchanged and continues to hold off on any further increases to its overnight call rate (OCR) owing to significant uncertainties surrounding firms' wage- and price-setting behavior. It is notable that while the Bank raised its 2024 inflation target, it concurrently downgraded its GDP growth forecast.

• Unanimous vote on guideline for market operations
  
  − The short-term policy interest rate: the bankmaintained the OCR in a range of 0.0 – 0.1%. ▪ To achieve this guideline, the BoJ will applyan interest rate of 0.1% to deposits held by financial institutions at the Bank.
  
  − The long-term interest rate: the BoJ continues to commit to purchasing Japanese government bonds as necessary to prevent a rapid increase in interest rates.

• Guidelines for asset purchases (unanimous vote)
  
  − Implement a gradual reduction in the purchase ofcommercial paper and corporate bonds, with the intention to halt purchases within one year.

• Inflation is forecasted to remain elevated and hover near the 2.0% target until 2026, while GDP is expected to grow moderately. The bank has upwardly revised its 2024 inflation forecast to 2.8% YoY (previously 2.4%), attributing this adjustment to the recent surge in crude oil prices and the diminishing impact of government economic measures. Consequently, inflation is anticipated to gradually converge towards the Bank's 2.0% target, with forecasts for both 2025 and 2026 standing at 1.9%, driven by ongoing improvements in the output gap and the deepening interplay between wages and prices. GDP growth outlook for 2024 has been revised downward to 0.8% (previously 1.2%), primarily reflecting weaker private consumption. However, the bank's projections are subject to significant external and domestic uncertainties, particularly pertaining to geopolitics, wages, and foreign exchange dynamics.

• The BoJ to monitor the impact of yen and wage pass-through on inflation before considering further rate hikes
  
  − Tokyo's recently published inflation report for April fell below expectations, with core price growth slowing to 1.6%YoY, primarily attributed to education subsidies. Although this may not be reflected in the nationwide CPI, tepid price pressures, particularly in food prices, could prompt caution from the BoJ for the time being. The BoJ will closely monitor the impact of the weak yen and wage increases on prices before considering any further adjustments to its policy rate. We expect that July could be the earliest opportunity for another BoJ rate hike, particularly if wage increases in Japan spread to smaller firms, which employ most of the Japanese workforce. Higher wages could boost spending in the coming months, giving the BoJ more reason to raise interest rates, although economic vulnerabilities may limit its ability to do so.
  
  − USDJPY year-end forecast (132.02; 2023: 141.04): Governor Ueda remarked that the Bank "will adjust the degree of monetary easing if the underlying inflation rate rises," affirming that "easy financial conditions will be maintained for the time being." This stance may continue to exert pressure on the yen, particularly as the US economy demonstrates strength, with September now appearing as the most likely point for a Fed rate cut. Nevertheless, potential intervention by the BoJ could help mitigate losses in the yen in the short term. We anticipate two more rate hikes by the BoJ in 2H24, which could help strengthen the undervalued yen to below 140.0/USD by year-end.

Source: Kenanga Research - 29 Apr 2024